A reader recently reached out to me, asking about a trade I put on.
I’m paraphrasing, but the conversation went something like this:
Reader: “The implied volatility of the MSTR June 450 calls is 64.7%. That is far from cheap, no?”
Me: “The absolute number of implied volatility is meaningless to me. I’m paying attention to its relative value. I want to know where IV is now compared to where it’s been.”
Reader: “Wow. That amazes me. I always thought the implied volatility was an indication of how expensive an option was. Could you write an educational piece on this sometime please?”
Dear reader, your wish is my command.
Here’s the thing about options premiums (and implied volatility, or “IV,” which measures premiums) – they mean revert.
When IV spikes, it’s only a matter of time before it comes back down. And when IV is low, it’s likely that any sudden premium moves will be to the upside, not the downside.
As is common when the stock market is moving lower, we're seeing rising options premiums. We aren't seeing any big volatility spikes yet, and $VIX is still relatively muted, but the recent rise coupled with setups that appear to be ripe for some sideways action in the coming weeks and months has me on the hunt for delta-neutral premium selling opportunities.
Today's trade is in a metals and materials stock that appears to be stuck in a year-long range that we're betting on continuing.
Check out this chart of Freeport McMoran $FCX for a visual of what we're seeing:
No matter how you measure volatility, there is no ignoring the fact that the daily moves (both realized and expected) have shrunk dramatically in the cryptocurrency space, most notably in granddaddy Bitcoin $BTC.
Here's Strazza this morning on twitter:
Implied volatility can remain muted for as long as it wants to. It's not going to expand on my schedule. But at least when we're range bound and options prices are relatively cheap, we can position ourselves further out in time to take advantage of the next big move.
Today on the Morning Show, JC was talking about bitcoin and how if you want to underperform the next leg higher in crypto, then own bitcoin. But if you really want to get some juice for the next crypto rally, the crypto mining stocks are how to participate!
In particular, both JC and Strazza like Riot Platforms $RIOT and Marathon Digital Holdings $MARA.
And specifically, we all like what could have been a recent "oops" or fakeout-breakdown that may have just shaken out all the weak hands, clearing a path for the next move to new cycle highs:
With $MARA flirting with breaking back above $16.00 per share today and implied volatility in the options near yearly lows, it feels like high time to catch the whipsaw back to highs.
The famous duck on our television screens that interrupts nearly every commercial break during football season is setting us to pay us back for all those annoying "Aflac!" utterances.
New all-time highs + low volatility sets up my favorite trade.
Sector rotation continues to pump new blood into the bull market that's been running for over a year now (yes, over a year, hater). And as it does, we love getting into stocks that are late joiners. These stocks have seen some tremendous rips. Just look at the chart of Caterpillar ($CAT) as but one of numerous examples I can point to. That's what today's trade has the potential to do.
Our Commodities Analyst Ian Culley recently reported on several energy stocks we need to be paying attention to. And one of them just got earnings out of the way. Implied volatility priced into its options was already suspiciously low before the earnings report, so this sets up a great opportunity for a simple long calls play.
And we've got a big round number up ahead that would represent new all-time highs which should act as a magnet to help us out.
I love the base resolution underway in $IBKR and we've got a "hundred-dollar roll" lurking within spitting distance.
A break above $91 would mean fresh all-time highs and coupled with low implied volatility priced into calls options, this sets up my favorite kind of trade.
I’m continuing to travel throughout Southeast Asia — to eight different countries — with my All Star Charts analyst Steve Strazza, giving presentations at local Chartered Market Technicians (CMT) Association events, meeting local traders, enjoying native cuisines, and just marveling about the similarities we traders from different corners of the world all share.
So for the rest of the month of July and into early August, I’m going to cut the preamble and get right to the action for you guys.
As such, here’s the trade I’ll be putting on today:
As many of you know, Steve Strazza and I are touring South East Asia this month. We're hitting the homestretch of our trip, with about a week or so left. We're currently in Hong Kong and this city is beyond description. I don't even know where to begin. It's a cliche to say "you have to see it to believe it." But it is 100% true in this case.
As you can imagine, it's been a bit of a logistical challenge to keep up with the U.S. markets when we are on the other side of the globe. U.S. trading hours in Hong Kong are 9:30 pm to 4:00 am. Lucky for us, many of the positions we have on have been performing well. We've been positioned for a continued bull market and we're definitely being rewarded over the past few weeks.
We're currently positioned long in stocks like $AAPL, $MARA, $KBH, $GXO, $CARR, $VRRM, $ABNB, $IONQ, $DKNG, and more.
I mention this because as I'm looking at candidates for new long trades that we like, I am frustrated that most report earnings over the next 1-2 weeks. And as you know, I don't like positioning when a stock is so close to reporting earnings. I don't like the binary risk.